Opinions & Ideas

Category: Greece


We read that there is a severe outbreak of anti German feeling in Greece.Under the second EU/IMF bailout, Greece is being lent extra money  at interest rates  far below those at which it could borrow commercially, and in the meantime a portion of its existing debts are being written off. 
But  Germany is being blamed for the  unwillingness of the EU and the IMF  to sign off on this  second bailout , without , what some Greeks see as,  humiliatingly detailed assurances that
  • the money will be used properly ,
  • Greece will adopt specified policies to cut back state spending and raise taxes and that it will
  •  liberalise its economy, so that it can grow fast enough to be able to repay the extra money it is now to be lent.

The trouble is that Greece has a poor record in presenting honest accounts, and in implementing in practice, changes it has agreed to in principle. The extra assurances are being sought so that more good money is not poured down a black hole along with the debts that are now being partially written off.
Without this loan, Greece would default and it would leave the euro.
In fact, what Germany is really doing is defending the interests of savers, including Greek savers, from what would happen, if Greece defaulted and left the euro. If Greece left the euro, its banks would collapse, and Greeks would see their savings, whether   in the form of bank deposit accounts, life assurance policies, or claims on pension funds, disappear.


Some argue that “austerity” is a mistake, because the cuts in spending and tax increases dampen confidence so much that the economy stops growing. In the short term, this is true.  But those who criticise on that basis,  have no realistic alternatives to offer.
Where can Greece get the money on better terms than it is getting from the EU/IMF?  
There really is no Keynesian alternative for Greece.   The Greek economy is too elderly, too inward looking and too riddled with restrictive practices, to benefit from a Keynesian stimulus, even if someone could be found to finance it. Greece must modernise first. The EU/IMF programme gives it some breathing space (perhaps too little) in which to do that.
Keynesian economics might have been relevant in the  1930s, when the European  population was much younger and could respond to an economic stimulus.  Europeans today are much older, many are retired, and their priority is saving for their old age, rather than going out shopping in response to a boost in government spending. It is not going to get easier. The age dependency ratio in the EU in 2007 was  25%, by 2050 it will be 50% !   What people are looking for now, is stability.

 Greece faces an alternative of two forms of austerity
  • austerity through  planned  cuts and tax increases under the EU/IMF programme or
  • austerity through indiscriminate inflation, of the kind that would  occur, if Greece  left the euro and devalued.
One of Greece’s problems is that it finds it very difficult to reduce wages, which is one of the many things it needs to do if it is to make its exports more competitive. Wage setting is highly regulated in Greece. That is why some favour Greece leaving the euro and allowing devaluation and inflation to cut the real value of Greek wages, and thus  regain competitiveness.  Inflation is the politically easy way to impose wage cuts, but the effect on living standards is at least as bad as cutting the wage rate, and much harder to control.
 But the price of this inflation/devaluation option would be high.  If Greece left the euro, its banks would collapse and the savings of ordinary Greeks, who were patriotic enough to leave their money in Greek banks, would disappear.  Inflation is hard to keep in check once it starts, and Greece also lacks big export industries ready to boost exports quickly on the back of a devaluation.

It is true that current EU policies are favouring savers over borrowers.    This is so because the ECB, unlike the US Federal Reserve and the Bank of England, is not willing to engage in “quantitative easing” ,printing money indiscriminately, to revive the economy temporarily.
ECB refuses to print euros without limit, and refuses to use them to buy Greek bonds without conditions. It refuses to do so because that would lead to inflation, and to a devaluation of euro. The more euros that are printed the less the euro will be worth.  That, of course, might suit borrowers, because the euros they would using to pay back their debts at the end of their loan, would then be worth less,  than the euros they borrowed in the first place.
But that approach would be bad for savers, who would see the purchasing power of their savings disappear.
The real political divide in our societies today, is not between Greeks and Germans, or between the profligate Mediterranean nations and the thrifty northerners.
It is between savers, who do not want their savings devalued or confiscated, and borrowers, who would like to be allowed to pay back less than they owe.


But if borrowers pay back less than they owe, someone somewhere else has to take the hit.
If  borrowers are helped by having  their debts being  written off, or having  their debts  are  devalued by inflation, someone else will lose.
Who would lose? 

  1. The losers would include taxpayers, who now own  many of the banks, and who would  see the value of those banks go down
  2. Other losers would be pension funds and insurance companies who own bank shares, and the people who rely on these pension funds and insurance companies to pay their pensions, or insure them against risk.
  3. Yet other losers would be   the people who have deposits in banks, who would see the value of those deposits reduced by inflation, and who could even lose those deposits if the bank collapsed. 
The challenge we face is that of devising an economic policy that acknowledges that there are ”ordinary” decent  people on both sides of this divide.
We also need to acknowledge that no one will be willing to lend any European Governments money any more unless they face up to realities about the cost of ageing societies that will  grow steadily everywhere over the next twenty years.
Greeks bashing Germans, or all of us bashing bankers, may give emotional satisfaction, but it will not pay our bills.
We need to think things through , rather than emote. We  need to strike a balance between debt relief, and protecting the savings we need to prepare ourselves for  a time when, instead of four,  there   will only two people at work,   for every one  that is  one too old to work


The world is watching the political and economic situation of Greece with uncomfortable fascination. There is a widespread fear that, if Greece is unable to pay its debts, there will be a chain reaction.

The first part of the chain reaction could affect the solvency of some European and American banks who lent to Greece, and who would not be getting all their money back.  Those who sold credit default swaps with those banks could also be caught.

The second part of the chain reaction would affect other Governments, who may not have quite as difficult a situation as Greece, but who, like Greece, have to borrow to cover day to day expenses because their tax revenue is insufficient to cover their outgoings. Ireland is in this category.  Lenders who lose money they had lent to the Greek Government, would be even less willing, than they are now, to lend to other Governments. A 21st century precedent of an advanced European country defaulting on its debts would have unknowable consequences in a fragile and volatile world.  

I have read a recent publication by a German economic think tank, the Ifo Institute, about Greece.
The conclusion I drew from it was that the problems, now coming to a head in Greece, have been obvious and knowable for at least twenty years, long before Greece joined the euro.

If mechanisms were not insisted upon to remedy those problems, before Greece joined the euro, then responsibility must be shared for that by all the member Governments of the euro, who admitted   Greece into the euro. The European institutions, that were supposed to be examining the  accounts of the Greek 
Government to ensure that those accounts presented an accurate picture of Greece’s real liabilities, have to answer for their omissions too.

Greece was one of the fastest growing economies in Europe from 1950 to 1973, but thereafter it stagnated. But public spending went on growing, from 23% of GDP in 1970, to 30% in 1980, and to  49% in 1990. By 2009, it was 52% of GDP.  A lot of the money went to pensions and extra public sectors jobs.   Whenever a Greek politician arrived at an international meeting, he was accompanied by an entourage that was four times as big as any other.
But tax revenue was not keeping pace. The Government  debt level grew  especially  quickly in the  1990s when guaranteed debt of state companies  were taken onto the Governments own  balance sheet, and  money the Government borrowed from its own  Central  Bank had to be properly accounted for.  This was known before Greece was admitted to the euro.

Greece does have a tax collection problem.

This is because it has such an exceptionally high proportion of its workforce who are self employed, or who are in the non traded sector of the economy ( ie. sectors who cannot export their services, like doctors, shopkeepers etc.).  The extent to which people pay due taxes is lower than elsewhere in these two sectors………almost everywhere in the world. Seemingly tax evasion by the Greek self employed in not much worse than by the self employed in the  US, the Greek problem is that  self employed people make up a much  bigger share of the Greek economy, than they do  of the US economy.  Greece’s tax collection problem thus has more to do with the structure of its economy, than with any uniquely Greek aversion to paying tax.

All these facts must have been  known to the European Central Bank, the Banque de France, Bafin (the German regulator), and all the other  supervisory authorities, when  the banks they were supervising  lent  vast sums to the Greek Government, during  period  since Greece joined the euro.  While its exact scale may have been concealed by accounting tricks by the last Greek Government , the fact that there was a huge problem  was knowable.
I believe that it is time to face up to the full extent of the sovereign debt and banking problem in Europe.
We need now is a ten year plan for the euro zone, not just a ten month plan!
Europe must align its income expectations to its productivity. At the moment, the first is running well ahead of the second. Productivity must catch up, or income expectations must fall back.  In some cases, the gap will take years to close.  These  social choices are unavoidable, but  have to be made in a democratic way.

Voters are able to face reality, so long as everything is laid out before them.
In the countries who lent foolishly, as much as in those who borrowed foolishly, the authorities should own up to their share in the mistakes.  That has not happened yet in every case.

Once that is done, Europe can move on more convincingly

1.)   to devise a political structure to prevent irresponsible borrowing by Governments, ( One suggestion is an EU veto on national budgets)
2.)   to increase productivity and allocate scarce resources more wisely, (This is more  difficult because it requires action by the private sector, which has  misallocated time and money in the past)

3.)  to slim down the financial sector, (This is not happening, layoffs are taking place everywhere except where the problem started!)

4.)  to make banks safe to fail, rather than too big to fail, (This requires  a much higher capital ratio) and

5.) to build a large contingency fund, by contributions from all members, that will stand behind Governments who have kept the rules, but who face temporary  difficulties beyond their control.  Until a fund is built up, standing behind weaker countries involves a risk for  countries who have good credit ratings and who have to pledge that credit to help out  the weaker countries.   

Modern European Economy

The International Monetary Fund (IMF) is a body that has more experience than any other, in dealing with countries in financial difficulty. Commentators at home and abroad will have been paying close attention to what it said last week about Ireland’s management of its problems.
Last week Mr Chopra of the IMF endorsed unequivocally the actions of the new Government here in its implementation of the IMF/EU financial programme.
He praised the Governments sense of “ownership“of the programme, and its “decisive approach” on the banking situation. This approach had “doubled existing buffers against possible losses through 2013 and beyond”. I would add that Irish banks are now better capitalised than the banks of most other EU countries, including especially some of the bigger EU countries.
Mr Chopra said Ireland was doing all it could to “get ahead of problems”. Any adverse developments there had been had been due to external developments. The European Commission also noted last week that Ireland’s performance was “on track”.
Mr Chopra reminded his listeners that an increase in Ireland corporation tax rate was not part of the agreed EU/IMF programme because , as he put it, such an increase would not be “consistent with the overall goal of the programme in sustaining growth”.
I am confident his words will have caught the attention of the French Minister for Finance, Christine Lagarde who, as an EU Finance Minister, endorsed the EU/IMF programme in the first place. She will also have noted that Irish corporation tax receipts had “overperformed”, in the IMF’s words, and are thus contributing more, not less, than expected to Ireland’s loan repayment capacity.
On the question of interest rates on loans, he reminded his listeners that the IMF applies a uniform interest rate to states borrowing from it. It did NOT vary rates to borrowing states to suit the political demands of contributing states.
He also told all of us in the European Union that we need to reassure the markets by putting in place
“the right amount of finance, on the right terms, for the right duration”
to support states in the eurozone who may get into difficulty. That is the only way to convince markets that there will be no defaults. As far as Ireland is concerned, those who may have been alarmed by Professor Morgan Kelly’s article in the “Irish Times” should read the response in the same paper by Dr Anthony Leddin and Professor Brendan Walsh .
Those who talk lightly of default and restructuring by Greece should pay attention to what that would do to Greek banks. It would destroy the collateral that those Greek banks use to borrow from the ECB, and this would lead to an overnight loss of confidence in those banks, with disastrous and sudden consequences for Greek savers, and for its entire economy. Remember that Greek banks, businesses and Government would still need to borrow NEW money after any restructuring, “reprofiling”, default that might take place, and they would find it much more difficult than before to borrow that new money. If Greece was like Ireland, and was more dependent on foreign investment than it is, that problem would be even more severe.
The sort of changes Greece is going through are very painful indeed, but just as things can get better, they can also get much much worse, if the wrong decisions are made either by Greece itself, or by populist politicians in other European countries who somehow pretend that they can allow their neighbours to sink below the waves, with no consequences for themselves.
The truth of the modern European economy is that we are all tied together, and we can either keep one another afloat, or drag one another down.
In a recent article, the highly respected German magazine, Der Spiegel , said that “communal feeling in the EU is crumbling” and that the Government was “not even trying “ to put that right.
I note also that a far right party, opposed to more help for Greece, did well in a recent Austrian election. Austrian electors should remember that, even in the 1930s Europe was so tied together, that when an Austrian Bank, Credit Anstalt, collapsed in 1931, it led to a rash of bank collapses all over Europe. If that was possible in the much less interdependent Europe of the 1930s, it is even more likely today. EU help today to several central European EU members is critically important to the health of the Austrian banks.
European electorates everywhere need to recognise that time will be needed to rectify the deep and unstable imbalances that grew up in our economies since 2000, under the temporary anaesthetic of artificially cheap imports, and artificially low interest rates. That is why Me Chopra’s advice about the EU putting in place the “right amount of financing, on the right terms, for the right duration” is so wise.
The EU leadership needs to develop a convincing narrative that explains, in everyday language, why we are doing what we are doing, why it will take time, and how the actions we are taking now, will eventually lead to a European economy that is much more secure than the bloated and bogus prosperity that we experienced from 2000 to 2007. Telling a convincing story about the future is a vital part of political leadership, and we need such leadership in the European Union, now more than ever before.
I believe that the EU will have to move closer together politically, if we are to survive economically. The politics of this is just as important as the economics. People in all EU countries, rich and poor, need to feel a sense of ownership of the European Union.
The creation of the EU in the 1950s was a first in world history, a completely voluntary pooling of sovereignty by states that had recently been at war with one another. It was an outstanding example of political engineering, as well as of visionary imagination.
EU’s leaders today need to apply the same combination, of imagination and practical political engineering, to developing communal feeling among the member states of the euro, and to sustaining its democratic legitimacy of the euro, as they are giving to its economic underpinning.
This is only the first crisis we will have. There will be many more. We need political institutions in the EU that are strong enough, democratic enough, decisive enough, and inclusive enough, to face anything the future may throw at them. That is the enduring lesson we must take away from this crisis.

Keynote address by John Bruton, President of the IFSC, at the European Insurance Forum in the RDS Concert Hall at 8.30 am on Monday 23rd May .

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